Hanes Brands, Inc. – Saving VAT on an EPZ construction project

The Assignment

  • HanesBrands, Inc. is a socially responsible manufacturer and marketer of leading everyday basic apparel under some of the world’s strongest apparel brands in the Americas, Europe and Asia, as well as in Australia and South Africa.
  • Its supply chain is highly integrated; spanning from the production of textiles, finishing, cutting and sewing, through to distribution and retail.
  • In the early 2000s the company decided to restructure the wholly-owned and managed portion of its supply chain to take advantage of lower labor costs in Asia, where its contract manufacturer suppliers had been producing for years.
  • Hanes had moved a majority of its production to nearshore locations in Central America and the Caribbean to take advantage of CAFTA opportunities, but was looking to diversify its supply chain as well as balance the rising costs of manufacturing in the Americas, by looking to Asia.
  • Since 2006, Tractus has been engaged to assist executive management with a broad range of its Asia supply chain restructuring activities including
    • Asia-wide site selection (China, India, Thailand and Vietnam);
    • Real estate and Investment incentives negotiations in China;
    • Registration of the legal entity and project approvals for a US$150 million textile processing plant;
    • Commercial and taxation consultancy;
    • Negotiation with Customs and the EPZ administration;
    • Supplier identification and negotiations,
    • EPCM vendor identification, due diligence and negotiations, and;
    • Design, engineering and construction client representation.

Tractus’ Solution

  • During this project, Tractus acted as the central investment program manager coordinating with all parties involved;
    • HanesBrands executives and managers responsible for the investments;
    • Government authorities at the economic development zone (EDZ), municipality and provincial level, including the Construction Bureau, Fire Protection Bureau, Environmental Protection Bureau, utility suppliers, and;
    • Third-party service providers such as the chosen local law firm, tax advisor and EPCM Company.
  • HanesBrands chose to locate the textile mill in an EPZ (Export Processing Zone) because most of its raw materials were to be imported and all of the production was destined for export to Hanes’ sew plants in Thailand and Vietnam.
  • According to relevant regulations, many types of construction materials that are used within an EPZ are entitled to a VAT refund. Tractus encouraged the client to fully utilize this right to lower construction cost.
    • The client’s tax advisor agreed with our suggestion, but had no idea on how to practically ensure the VAT refunds were applied for correctly;
    • According to the regulations, in order to qualify for the VAT refund, the investor in the EPZ needs to be the importer of the materials.
    • The chosen EPCM firm showed their serious concern and strongly disagreed with this plan. They wanted to allow the contractors to purchasetheir own materials directly as this was their contractual responsibility as well as to allow them to make a reasonable profit on the materials being used.
    • The client’s legal advisor had no experience with EPZ special administrative status and didn’t want to advise on how to structure a suitable commercial arrangement to mitigate all stakeholder concerns.
  • With our cross-industry and cross-specialty experience, we clearly understood the concerns of the contractors and EPCM firm, but also understood there were ways to mitigate these concerns.
  • After a thorough analysis, internal discussions with relevant parties and external discussions with the EPZ administration, Customs and tax authorities, we developed a mechanism, including a detailed implementation procedure, to enable Hanes to benefit from the VAT refund without impacting any party’s interests.

 

Result

Cost savings through effective negotiation

  • Hanes saved over US$1 million on the construction cost as a result of the VAT savings alone.
  • Additional savings of over US$500,000 were achieved on the construction cost through effective negotiations with EPCM firms bidding on the contract.

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